Beware of AG Rollback TX

Posted on February 25, 2008
Filed Under |

by Curtis Reddehase
When your clients have agricultural land and qualify for the agricultural appraisal tax breaks, they need to be aware of the rollback tax penalty. Likewise buyers need to be aware that when they buy property that is receiving the agricultural appraisal tax break, the rollback penalty may be an unwelcome and very costly surprise after the purchase. What is the rollback tax and how does it happen? The following information should help you and your clients when considering rural land purchases.

For many years Texas tax laws have imposed a penalty on a property owner who has qualified for the agricultural tax break and then stops using their land for agricultural purposes. A sale of land, in itself, does not trigger the rollback tax. Instead, the person must physically divert the land’s use to a non-agricultural use. The county’s chief appraiser makes the determination when a property’s use changes from an agricultural use to a non-agricultural use. After this happens, the property owner will be mailed a rollback tax bill that can often be quite expensive. It’s an accumulated 5-year tax bill. The five-year rollback tax is the difference between the taxes paid on the land’s agricultural value and the taxes that would have been paid if the property was taxed at its higher market value. In addition, 7-percent interest is added for each year from the date the taxes would have been due. Think of property that may have a market value of $10,000 an acre but the owner has been paying property taxes on an agricultural valuation of $200 an acre. Add to this the 7 percent interest per year (that’s 35 percent on the 5th year!) and you can quickly see how expensive some rollback tax bills can become. The person who changes the land’s use is personally liable for the rollback taxes, even if he or she did not own the land during the five-year rollback period. The Texas Legislature imposed this penalty to try to encourage property owners to keep Texas farm and ranch land under cultivation.

Luckily, you may have several months to pay the bill. If the tax collector mails you an agricultural rollback tax bill this month (January, 2008), the delinquency date on the bill would be February 1, 2009. The law states that the rollback tax with interest is due when the collector mails the tax bill. It becomes delinquent if not paid before the next February 1 that is at least 20 days after the collector mails the bill.

You may prevent a rollback by not diverting the land’s use to a non-agricultural use or letting it lay idle. If your clients are buying land that has the agricultural tax designation on it, they may prevent the rollback by keeping the property’s use in agriculture, either what the seller was doing with the property or some other agricultural use. One warning sign to be aware of is land that is receiving the agricultural designation, but the property’s fences are down and there are no signs that the seller has had livestock or crops on the land in years. If the appraisal district happens to find out the property’s use has changed after the sale has occurred. It may be the buyer who is stuck with the rollback bill. Texas laws do require sellers to notify buyers of the possibility of rollback taxes.

Austin real estate seems to be doing relatively well in today’s market, the same goes for Lago Vista real estate.